Rising interest payments, uplift spending strained Pakistan's fiscal position in early FY27: ministry

ISLAMABAD: Despite a massive 90 per cent cut in subsidies and higher-than-targeted revenue collection, Pakistan’s fiscal and current account buffers weakened at the beginning of the current fiscal year (FY27) owing to an almost 37pc increase in interest payments coupled with greater development spending.

The “overall fiscal surplus narrowed to 0.8pc of GDP (Rs1.198 trillion), compared with 1.7pc of GDP (Rs2.124tr)” in the corresponding period of FY26, said the Ministry of Finance’s Monthly Economic Update & Outlook report issued on Thursday.

“Similarly, the primary surplus declined to 1.6pc of GDP (Rs2.3tr), from 2.3pc of GDP (Rs2.94tr) recorded in the same period last year,” it added in the report’s October edition.

The government, however, pledged to keep fiscal policy focused on preserving stability through stronger revenue mobilisation and prudent expenditure management.

The report said the overall fiscal operations began on a positive note in FY27 as tax revenues surpassed target. Net federal revenue amounted to Rs2.9123 trillion, exceeding federal expenditure of Rs2.124tr. This contributed to a federal fiscal surplus equivalent to 0.5pc.

The Federal Board of Revenue’s (FBR) tax collection posted 3.6pc growth during July-August. Total expenditure increased by 20.7pc, “driven primarily by a 69.5pc surge in development expenditure, significantly outpacing the 14.7pc growth in current expenditure”, the report said.

“The relatively moderate increase in current expenditure was largely attributable to an 8.1pc decline in non-interest expenditure, mainly reflecting a sharp 90pc reduction in subsidies. In contrast, mark-up payments increased by 36.6pc,” it highlighted.

While flagging the geopolitical tensions, trade disruptions, elevated commodity prices and uncertainty around technology investment as principal downside risks, the government also expressed cautious optimism over continued economic recovery, drawing support from better crop output, selective manufacturing industries and improving external earnings.

“The recovery in FY2027 is expected to draw support from improving crop prospects, selected manufacturing industries, domestic construction activity and expanding external earnings,” the finance ministry said in its report.

It expressed hope that steady demand in Pakistan’s main markets – the United States, the United Kingdom and the Organisation for Economic Cooperation and Development (OECD) – would support the outlook for goods and services exports.

FBR revenues grows 7pc in 1st quarter

During July-September FY27, the report said the FBR tax collection grew by 7pc to reach Rs3.086tr, exceeding the target by Rs33.2bn.

Both direct and indirect taxes posted positive growth, increasing by 5.5pc and 8.3pc, respectively. Within indirect taxes, sales tax recorded the strongest growth at 11.6pc, followed by federal excise duty at 3.6pc and customs duties at 0.5pc.

In its report, the finance ministry also supported the State Bank of Pakistan’s (SBP) decision to increase the policy rate by 50 basis points to 12pc earlier this week despite higher interest burden on the fiscal account.

It said the decision was meant to address rising inflationary risks stemming from the intensifying Middle East conflict and persistently high global energy prices.

“The decision aims to anchor inflation expectations, contain second-round effects, and keep inflation within the target range while preserving macroeconomic stability and supporting sustainable economic growth”, it said.

According to the report, the current account deficit in the first quarter of the current fiscal year was reported at $874 million, almost 16pc higher than $755m in the comparable period last year.

The finance ministry boasted of the $3bn Eurobond issue in September as the “quarter’s significant development” in delivering stronger foreign inflows and improved access to international capital markets.

The report said portfolio investment consequently recorded net inflows of $2.9bn, compared with net outflows of $633.3m a year earlier. Foreign direct investment (FDI) also increased by about 20pc to $720m, “providing further support to the financial account”.

“Together, these developments helped deliver an overall balance of payments surplus of $3.1 billion, compared with a deficit of $274 million in the corresponding quarter last year,” the report underlined.

It added that by Oct 16, the SBP’s liquid reserves stood at $21.5bn and total liquid reserves at $26.8bn.

“The stronger reserve position and broader financing access enhance Pakistan’s capacity to meet external obligations and sustain economic activity despite fluctuations in global energy prices,” it said.

The finance ministry expected the stronger agricultural output to support food processing, rural incomes and trade, while machinery imports contribute to productive capacity as investment projects are implemented.

“Rising services exports and remittances provide a further source of foreign exchange and household income. The stronger reserve position and broader access to external financing are creating a more supportive environment,” the report stated.

The report projected the headline inflation to be in the range of 9.5pc to 10.5pc for Oct 2026 and linked the subsequent price trajectory to international energy prices, food supplies and base effects.

“Continued progress on tax administration, energy efficiency, and state-owned enterprise reform is expected to support a durable expansion while containing pressures on the external account,” it said.

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